April 9, 2007
To Whom It May Concern:
With all due respect to many of the individuals contributing comments to the Commission regarding the terrible harm caused by naked short-selling, I ask that the Commission review what type of investor can be harmed by naked short-selling. The most common type of individual investor invests via a mutual fund or in stocks with the intention of achieving long-term gains. A large naked short-position on a stock should have no impact on that stock in the long-term (over one-year) as the basis of a stocks price over such a horizon is the expected cash flow from the stock over a 5-7 year period plus its terminal value, discounted for its weighted cost of capital, and mutual funds also tend to have a long-term view and avoid high-risk investments. The key individuals who may be harmed are day-traders trading in risky investments as the immediate price of the security may be undeservingly depressed because of the high selling pressures on the stock. Day traders who maintain their position would only have a temporary mark-to-market loss that should reverse itself in the near-term. Those who do not have willingly taken this risk in their purchase of the security and are likely balanced out as a zero-sum gain because of similar type traders who are short the position. Therefore, the overall impact to the market is minimal if any. Regardless, such day-traders are a clearly an insignificant portion of total investors and so this issue does not, as a whole, impact the investing public to the degree that comment contributors would like it to appear to be.
Thank you for taking this into you consideration,
Ayal Rosenthal